JGB market mood sours sharply ahead of election - Reuters survey

November 25, 2012|Reuters

TOKYO, Nov 26 (Reuters) - A weekly gauge of sentiment in theJapanese government bond market worsened to a level not seen innearly five months on speculation of more aggressive monetaryeasing following a likely change in the government after anelection next month.

The weekly poll's JGB bull-bear diffusion index, calculatedby subtracting the number of bearish market players from thosewho are bullish, came in at minus 33, falling sharply from minus6 in the previous week's poll.

The latest reading was the lowest since minus 61 marked inearly July.

The market has been betting on a bolder monetary easing bythe Bank of Japan as the main opposition leader Shinzo Abe, afront-runner to win the election on Dec. 16, called for a higherinflation target and unlimited easing -- so called "Abe trade"as investors also bet on a cheaper yen and higher Japaneseshares.

As a result, the yield curve has been steepening as shortermaturities held firm while superlong maturities underperformedon future inflation as well as concerns about more publicspending by a new government.

The median forecast for the 10-year JGB yield for the end of this week was 0.748 percent, above Friday'sclosing level of 0.735 percent.

"We are likely to continue to see bets on the election.There could be duration extension (by pension funds) but nextweek's auctions of 10- and 30- year bonds will be weighing onmarkets. The curve will continue to steepen," said a fundmanager at an asset management firm.

The spread between 10- and 20-year yields rose to as high as95 basis points, its highest level since 1999. The 20-year bondyield stood at 1.675 percent at the end of last week, not farfrom its peak of 1.700 percent hit three times in recent months.

On the other hand, the 10-year benefited from firmness inshorter maturities, with its yield still near a nine-year low of0.720 percent hit in July, though few players see room for afurther fall in yields.

The online survey of 94 JGB market participants from majorinstitutions received 36 responses, for a response rate of 38.3percent. These included 17 responses from "real money" investorsfrom institutions such as banks, pension and investment fundsand insurance companies.

The survey was conducted from Thursday to 8:00 a.m. onMonday (2300 GMT on Sunday).